Research Proposal

EFFIECIENCEY OF STOCK MARKETS IN PAKISTAN

INTRODUCTION TO THE TOPIC
Market Efficiency is directly or implicitly tested any time a study is performed to identify stock price reactions to certain events such as dividend announcements and, earnings announcements, stock splits, large block transactions, repurchase tender offers, and other public announcements. Traditionally, event study methodology is used to evaluate the reaction of the market to certain corporate events. These studies which are specific in nature are designed to measure market efficiency at certain point in time and only in conjunction with specific events. A more encompassing or macro evaluation of market efficiency can be made by testing whether or not the returns in a market follow a random walk process over a longer period of time. Financial theory predicts that stock prices should fluctuate randomly in the short run if the stock market is efficient. The semi-strong form of the Efficient Market Hypothesis holds that the market instantaneously absorbs all relevant information as it becomes publicly available. Hence, daily returns should fluctuate as random white noise. There has been phenomenal increase in the turnover of shares on the stock market from1.0 billion in 1991-92 to 67.6 billion in 1999-2000 and so on. Aggregate market capitalization has increased from Rs 218.4 billion in 1991-92 to Rs 392 billion in 1999-2000 a rise of 79.5 percent. Number of listed companies on KSE has increased from 628 in 1991- 92 to 762 in 1999-2008. Amongst global emerging markets, Pakistani stock market has been on the top with the highest percentage gain achieved during the year 2000, in automated and electronic trading and settlement system. The Securities and Exchange Commission of Pakistan (SECP) has accelerated its drive to enhance the efficiency of the stock exchanges and ensure protection of the interest of investors. Disclosure requirements are being made more stringent. Another

phenomenon taking shape with the general rise seen in the stock markets is the revival of the mutual fund industry. The funds are becoming more attractive and their portfolios attracting new investors to capitalize upon the current trends. With the recovery of Pakistani stock market, it is the opportune time for foreign funds to make their entry into Pakistani stock markets. The long-term outlook is promising and the markets are giving enough movement to pick up blue chips at attractive prices with good chances of reaping sizable capital gains on medium to long-term basis. There is ample scope for income funds to be launched. In short, Pakistani stock markets are on the road to better performance and efficiency. Although their volatility - an essential part of all emerging markets, creates higher risks, they also magnify the potential for higher returns for any investor who has the patience and sophistication to participate in the growth of this emerging market.

Literature Review
When money is put into the stock market, it is done with the aim of generating a return on the capital invested. Many investors try not only to make a profitable return but also to outperform, or "beat," the market. Efficiency of a stock exchange can be gauged in a number of ways some of them are described below (Pilbeam, 1998). Allocative Efficiency: Allocative efficiency of a stock exchange refers to how good are the markets in allocating scarce capital resources among competing users. In terms of allocative efficiency capital will be allocated to the firms that can achieve the best marginal returns.

Operational Efficiency:
Operational efficiency refers to the cost of raising capital. An ideal market would be one which provides lower costs of raising capital and viability of long term projects to raise capital as easily as short term projects. Furthermore investor would be faced with minimum transaction costs and competition between brokers should ensure only normal profits in the securities industry.

 Informational Efficiency:
Financial literature has concentrated on another type of efficiency besides allocative and operational efficiencies. This type relates to the pricing of security. By definition, informational efficiency provides that the current market price of a security instantly and fully reflects all the relevant available information. However, market efficiency, detailed in the efficient market hypothesis (EMH), formulated by Eugene Fama in 1970, suggests that, at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, according to the EMH, no investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else. Non-Predictability: The nature of information does not have to be limited to financial news and research alone; indeed information about political, economic and social events, combined with how investors perceive such information, whether true or rumored, will be reflected in the stock price. As prices only respond to information available in the market, and, because all market participants are privy to the same information, no one will have the ability to "out-profit" anyone else. In efficient markets, prices become not predictable but random, so no investment pattern can be discerned. A planned approach to investment, therefore, cannot be successful.

PROBLEM STATEMENT
When money is put into the stock market, it is done with the aim of generating a return on the capital invested. The problem statement or research question of my research thesis is to evaluate the efficiency of stock market. From efficiency I mean to evaluate the following areas of Karachi stock exchange: Allocative Efficiency:

Operational Efficiency: Informational Efficiency:

OBJECTIVES OF STUDY
The objective of my study is to educate the investors about the operations, allocation, and informational efficiency of Karachi stock exchange which they provide to its investors

SCOPE OF THE STUDY

The scope of my research is limited to Karachi stock exchange only which is the oldest stock market of Pakistan

METHODOLOGY OF RESEARCH
The research methodology comprises of: a) Review and analysis of related literature from Newspapers, Books, Journals and Internee as well as interviews from different scholars and investors who has expertise in this area. b) Discussion study. c) d) Questionnaires And finally I will compare the efficiency of KSE with some other countrys method for clarify concepts related to the research

stock markets in order for further comments and recommendations for application.

LIMITATIONS OF STUDY
As I discussed in the scope of my research proposal the limitations of my research will be only to the evaluation of efficiency of Karachi stock exchange

Data Collection
o Primary Data The primary data I will adopt only when I will give my recommendations and when I

shall compare the results obtained from my research thesis to another stock markets Data Collection Methods

Interview with officers and specialists. Interviews with investors Questionnaire.

o Secondary Data Although my research topic is all about the efficiency of Karachi stock exchange but I will consider internet and books as well as journals as my secondary data.

Discussion:
The entire project will be discussed with the supervisors and the scholars and experts of the specific area.

Conclusion:
Conclusion of my research thesis will be a brief summary of the entire project as well my personal recommendations

REFERENCES
Aasmund, Eilifsen (1999).Earnings Announcements and the Variability Of Stock Returns, Norwegian School of Economics and Business Administration. Akd website. Available at www.akdtrade.com Bajaj & Vijh (1995). Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements, Journal of Finance. Bajaj & Vijh (1990). Dividend Clienteles and the Information Content of Dividend Changes, Journal of Financial Economics. Bamber (1987). Unexpected Earnings, Firm Size, and Trading Volume Around Quarterly Earnings Announcements, The Accounting Review. Central Depository Company website. Available at www.cdcpakistan.com Copeland (1979).Liquidity Changes Following Stock Splits, Journal of Finance. Fama, Eugene (1970). Efficient Market Hypothesis The Journal of Finance. Global Securities Pakistan limited website. Available at www.gslpk.com Islamabad Stock Exchange website. Available at www.ise.org Karachi Stock Exchange website. Available at www.kse.com.pk Keith, Pilbeam (1998). Finance & Financial Markets. W.W. Macmillan Press Limited, London. Kim, Verrecchia (1991). Market Reaction to Anticipated Announcements, Journal of Financial Economics. Lakonishok and Vermaelen(1990). Anomalous Price Behavior Around Repurchase Tender Offers, Journal of Finance. (NECL) National Commodity Exchange Limited website. Available at

www.ncel.com.pk Securities and Exchange Commission website. Available at www.secp.gov.pk State Bank of Pakistan website. Available at www.sbp.org.pk